The FBR’s tax collection has reportedly fallen short by Rs100 billion from the target in the first four months of FY19. Nearly 38 percent of all sales tax (import and domestic) comes from petroleum products. The failure to pass on the full impact of increased oil prices and currency depreciation, by reducing sales tax on POL products, the loss to exchequer is estimated at Rs39 billion. This is just based on domestic sales tax, for two main POL products, namely, petrol and diesel.
There is no denying the fact that increasing petroleum prices, even though when it is about simply passing on the impact, is a politically tough job. The current government has, to its credit, taken two tough calls regarding electricity and gas tariffs. But it has been found wanting when it comes to petroleum pricing. Yes, a 43 percent increase in average Brent prices from the four months of previous year – makes it difficult. Couple that with a 25 percent dip in rupee value – and that surely is not a walk in the park to simply pass it on without tweaking the GST.
So the GST has been tweaked, so much so that is has averaged 8 percent for petrol ever since the PTI took office. This is down from 18 percent in the same period last year. The same goes for GST on HSD, which has been almost halved to an average of 17 percent from 32 percent last year. The result – the combined estimated GST collection for petrol and diesel combined in FY19 so far has been less than even the GST collected on HSD alone in 4MFY18 – and a massive 34 percent lower year-on-year.
The most obvious reason is the downward revision in GST – but the slowdown in POL volumes, almost all of it in the HSD – has been the other telling factor. The HSD consumption has come down by 17 percent year-on-year, which has alone contributed a loss of Rs12 billion to GST on HSD, even at current low rates. This is a clear indication of a slowing down economy, and a variable which is not much in the government’s control. Fixing the GST rate is.
The implications of a slowdown tell that the HSD consumption is slated to remain below last year. There are little reason to believe the HSD demand would bounce back anytime soon, in a slowing down economy. That essentially leaves the government with the option of praying and hoping that the international oil prices recede.
And it appears, the prayers are being heard already. There are talks of Brent heading south towards $60/bbl again – having shed 7 percent in November alone. Should oil prices continue to go down, it will be a smooth road for the government to gradually increase the GST and maintain prices at current level. It will still create political noise, but that will be much more manageable than the one that gets erupted in an event of a price increase.
Bear in mind, petrol in Pakistan is still priced 25 and 18 percent cheaper than India and Bangladesh, respectively. The tax incidence on petrol is also almost half of what it is in the neighboring countries. The episode is another timely reminder of Pakistan’s helplessness when it comes to international oil prices and undue reliance on easy tax money, i.e. GST in this case. International oil market will continue to be volatile in the longer run – and government’s guts will keep coming to test.
The potential full-year impact of Rs100-120 billion of lost revenue on petroleum GST, could still be averted – provided the international market stays the way it has in the last ten days. But it must not be the case.
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